Japan came out of a nuclear attack in WWII to become a massive economy, the third largest economy after the US and China, almost twice as large as Germany, and more than twice as large as either France or the UK. But since 1991 Japan has been in recession – called now the “lost twenty years” (失われた20年, Ushinawareta Nijūnen), where GDP and price levels have fallen and where the real wage has dropped. There has been a net population loss due to falling birth rates and almost no net immigration (despite one of the highest life expectancies in the world (81.25 years): so the country is growing old.
The lack of direction and vision in Japanese society is almost frightening: a cultural malaise has seized the nation almost like a nasty viral infection. Young people in Japan are, it seems, no longer in having sex: it is too “Mendokusai” which translates as “too troublesome” or “I can’t be bothered”, where romantic commitment represents burden and drudgery. This is related to the economic condition of the country in the sense of reflecting an attitude to the exorbitant costs of buying property in Japan and to the uncertain expectations from a potential spouse and the in-laws that come with the spouse. According to the Japanese population institute, women in their early 20s today have a one-in-four chance of never marrying and their chances of remaining childless are even higher at almost 40%. What is shocking about all this is that no-one is concerned. A detailed analysis of this malaise is to be found on:
Add to this depressing picture the results of the Fukushima catastrophe, a cataclysm caused not so much by the natural disaster that triggered it, but by the incredibly bad planning that led the Japanese bureaucracy to build nuclear power stations on earthquake fault lines, and by the now surprising lack of technical prowess, previously strongly associated with Japanese industry, which became clear in the blind trust the Japanese seemed to have in US General Electric designs and their inability either to understand these designs for themselves or to incorporate their own safety or back-up mechanisms into the construction and development. The unravelling cover-up since the initial disaster is only partly a political damage limitation exercise, and mostly sheer lack of an engineering grasp of nuclear power.
Estimates of the total economic loss from this range from $250-$500 billion. See:
The Fukushima disaster represents the largest discharge of radioactive material into the ocean in history, which for a country so dependent on fishing is a catastrophe of unprecedented proportions. See:
All this has lead to the panicky politics of Shinzō Abe which involves a new militarism expressing the country’s malaise and its social and political bankruptcy, as well as quantitative easing on an almost cosmic scale to try and restart a totally moribund economy.
The problem in Japan has always been the lack of flexibility of its society: in fact the whole Fukushima disaster is down to the “untouchable” élitist status of the Nuclear industry represented by TEPCO – the Fukushima operator and holding company for all of Japan’s nuclear power plants. Their ‘untouchability” has in fact led to innumerable cover-ups over the course of the recent disaster, which leaves no doubt that things must be much worse than has been reported, and costs probably much higher than even the worse estimates we have.
So a major part of the Western economic system has terminally failed is being propped up by the rest of the system, while beginning to drag it down. How did we get here? How have we come to have such a disastrous economic situation which seems to have impacted society to the extent of even negatively affecting the younger generation’s normal drives and values.
From the government led 30-year drive to rebuild the Japanese economy from the complete devastation of WWII until 1980, the country public debt had reached only 50% of GDP by the end of that period. By contrast, today’s public debt in Japan is 250% of GDP, a figure “off-the-charts” relative to all other large developed economies, unparalleled in history, and generated by massive deficit spending, followed by its modern cousin, quantitative easing.
These outcomes have to be viewed from the perspective that Japan’s post-war miracle was never the miracle it was claimed to be at all: in fact the Japanese economy rebounded from the ashes of WWII for three decades due only to massive public and private investment, depending on high household savings, and a rigid mercantilist industrial development and export promotion policy, depending on blatantly protectionist policies that kept imports out and the yen’s exchange rate far below its true economic value.
As David Stockman explains on:
Neither of these aspects was sustainable, leading to a capital goods and export sectors which were enormously over-built, and the double-digit growth in fixed asset investment which had powered Japan’s post-war GDP growth was inevitably destined for a sharp fall. A counter-protectionist reaction in Washington would bring this to an end, such that the drastically undervalued yen creating the country’s export surpluses was going to be reversed. When we think that the US has had exactly the same problem with China from the mid-1990s until now, and that the US administration has tried to force a revaluation of the Renmimbi (the “people’s currency”) of which the Yuan is the basic unit, and failed, we have to remember that Japan, unlike China, was conquered nation. Its bureaucratic élite, that same élite which swore by General Electric nuclear power technology and had made it an “untouchable” sacred cow of the Japanese system, that élite which was usually Ivy League-educated, made Japan – although in geographical terms as “Far-Eastern” as China was – an integral part of the “Western” economic system.
It was James Baker who led the Washington backlash and structured the Plaza Accords of September 1985 which Japan ended up signing. This led to buying programme for the Yen which drove Japan’s exchange rate from about 260 per dollar to 130 over the next few years. But this was not accompanied by any reform to the economy.
Instead, the Bank of Japan began to fund a deficit spending programme in response to these changes by slashing interest rates in early 1986, and this despite the fact that the economy had excess capacity in the capital goods sector, across all of steel, auto manufacturers, machinery, consumer electronics and so-on, as a result of the post-war boom. What Japan had actually needed at the time was higher rather than lower interest rates, in order to alter this chronic over-investment in export capacity.
All the easy money thus produced had to flow somewhere and it flowed into the financial sector, creating a massive bubble in real estate and corporate stocks and bonds. This “financialisation” of the economy led to businesses drastically expanding borrowing in the form of both straight and convertible debt, all of which went into speculation in real estate and financial assets – especially into the stock of other companies within the Keiretsu groups around which Japan’s state-led development model had been organized, artificially driving up stock prices.
The Nikkei index of the Japanese stock market rose fourfold during the 50 months after the Plaza Accord, while the price of land rose to insane levels, rising fivefold before the major crash of 1991 (at which point point the aggregate value of Tokyo real estate exceeded that of the US as a whole). Meanwhile there was a drop in the growth capacity of the real economy due to the now more realistic exchange rate and the end of the fixed-investment boom. The excess capacity of the export economy was faced with fierce competition now in foreign markets, and the bureaucratic élite, together with the ruling LDP political party, now sought through these new policies described above to “featherbed” their corporate constituencies: but this wasn’t just easy-money, there was also a thoroughgoing rigging of the domestic markets and outright protectionism. Construction deals, new credit, and corruption spread among these constituencies, leading to overbuilding and white elephant projects.
So in the two decades after 1990, Japan’s government expenditures rose by 45%, while its general revenues fell by 15-20% opening up a massive fiscal deficit that fueled the parabolic rise of debt as we saw above, leading to credit saturation which itself has led to low or negative growth ever since. Furthermore, bad economic advice from abroad led the Ivy League-educated Japanese élites to dismantle the government tax base in order to try and generate supply-side effects, with even worse results – leading to a drop in government nominal revenues over two decades, in amounts unparalleled in history.
The lethal combination of easy money and lax fiscal policy has now also been at the core of
Shinzō Abe’s “Abenomics”, encouraged by ex-US Federal Reserve Chairman Ben Bernanke who pushed the myth that Japan was experiencing “deflation” (rather than structural overcapacity) and who recommend on this basis that the central bank run its printing presses continuously and blindly until inflation rise back to 2%—– supposedly thus reflating nominal GDP, aggregate demand, and the wheels of production and jobs growth in the real economy.
Thus Japan adopted “ZIRP” (Zero-interest-rate-policy) in 1999 and piled post-Keynesian central banking on top of an already hemorrhaging fiscal situation, leading to the explosion in the Bank of Japan’s balance sheet from about 10% of GDP to nearly 50% today. This resulted in massive financial repression, which not to put too fine a point on it, has been to no avail. During the approximate 15 years since it originally adopted ZIRP, Japan’s real GDP has limped along at 0.9% per year, not significantly different than the 0.7% rate it experienced in the previous post-1991 decade.
The obvious effect of ZIRP is the collapse of Japan’s previously vaunted household savings rate (which had funded its post-war capital expansion), now to below even US levels, something which will prove a trial for the large expected retirements looming up ahead, where even in the short-term Japan looks like it will quickly devour its savings. The country is on the road as David Stockman explains to “… becoming an international pauper”. The other unpleasant effect of ZIRP is that it seems to promise that government debts can continue to be financed at close to zero nominal carry cost for the indefinite future. Clearly any kind of “rate normalisation” is an impossibility, with the close to zero financing costs on Japan’s long-term bonds, since the sheer size of the debt has meant that the interest carry cost has still been consuming nearly one-third of its current revenues.
The attempt to exit this financial trap through the insane policies of “Abenomics”, trying to achieve a dare-devil “escape velocity” for the real economy have now shown to have totally failed. The spectre of inflation has indeed been created, but the real economy has collapsed even further. Despite the newly cheapened currency, and the consequent rise in imports, exports have hardly risen due to the policy of offshoring production to China, which in our “financialisation” environment has been an integral part of the Japanese élite pandering to its corporate (keiretsu)constituencies, rather than seeking any kind of structural and social reform. There is no sense of national policy at all, a problem furthermore that we see across all “Western” economies anyway, where as Keynes said (see post below) “… enterprise becomes the bubble on a whirlpool of speculation… “ but clearly reflected in a much more serious situation in Japan, than in the rest of the “Western” economic system, thus representing the leading end of decline into the abyss. See: